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Get Four
|  | AUGUST 26, 2004
By Amy Borrus Pensions on a Precipice [Page 2 of 2] So would ditching pension plans help the airline industry restructure? Knocking out costly pensions alone won't offset the traditional carriers' triple whammy of the post-September 11 travel drop-off, high fuel prices, and the proliferation of low-cost carriers. And terminating plans can be a two-edged sword. "There is always the danger that the unionized workers who lose their pensions will want some sort of quid pro quo—reduced productivity or more flexible work hours," says Stuart Klaskin of aviation consulting firm Klaskin, Kushner & Co. in Miami. Consider the fate of US Airways. The carrier looked like it might pull out of its tailspin 17 months ago, when it filed for Chapter 11 and dumped its pilots' pension plan, underfunded to the tune of $2.5 billion, on the PBGC. But today it is again fighting off bankruptcy. At best, shedding pension plans would let the legacy carriers muddle along -- without sharply reducing bloated costs or eliminating the problem of too many carriers chasing too few passengers. Can the PBGC withstand a raft of pension offloads from the airline industry? In the short term, yes. The agency has $40 billion in assets and would inherit billions more up front from the carriers' plans to cover liabilities that would be paid out over decades. Still, a funding crisis looms. Already, the PBGC is paying out $3 billion in benefits annually and taking in barely $1 billion in premiums. Investment income doesn't cover the gap. A string of corporate bankruptcies, many in the steel industry, have already hammered the agency. And the PBGC's premium base is shrinking as more employers switch from their insured traditional pensions to uninsured 401(k) plans, where employees bear the risk of making sure they save enough for retirement. Since the mid-1980s, in fact, the number of traditional defined-benefit plans has plunged by more than 72%. Can the PBGC's finances be propped up? Not easily. It takes an act of Congress to raise the PBGC's premiums. A spate of airline pension terminations would juice the agency's campaign on Capitol Hill to switch to risk-based fees keyed to a company's credit rating and the funding level of its plan. Currently, the agency gets most of its premium revenue from a $19 annual charge for every worker whose pension is insured. The PBGC "is unable to control its own destiny" because it doesn't set its own premiums or control who it insures, says Steven A. Kandarian, PBGC's former executive director. But lawmakers and businesses are likely to balk. "Risk-based premiums put the higher burden on those who can afford it least," says Baruch A. Fellner, a partner at Gibson, Dunn & Crutcher and former PBGC associate general counsel. And raising premiums for all would penalize companies that have continued to fund plans. General Motors (GM ) floated a $14.5 billion debt offering last year to shore up its $19 billion pension shortfall. Higher premiums on top of that would be unfair, says gm Chairman G. Richard Wagoner Jr.: "It falls into the 'no good deed goes unpunished' category." The danger is that companies that have played by the rules get fed up and switch to 401(k) plans. Workers would get the retirement benefits they've accrued—but no new ones. So what's the likely outcome? Closing loopholes that let weak companies avoid making pension contributions would help to deter companies from overpromising benefits. So would raising the cap on tax-deductible contributions so companies could stash more in their plans in good times. But such reforms, which require congressional approval, may not come soon enough. Many experts think taxpayers will end up footing the bill for a PBGC bailout. "Unless PBGC gets lucky, this will be the next savings and loan scandal," says Kent Smetters, associate professor of insurance and risk management at the University of Pennsylvania's Wharton School. Except in this case, no one can say they didn't see it coming.
 With Lorraine Woellert in Washington, Nanette Byrnes in New York, and Joseph Weber and Brian Grow in Chicago Borrus is a correspondent in BusinessWeek's Washington bureau Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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